G20 backs off on deficit targets, holds firm on global reforms

In the end, the world’s top financial leaders gave a little and held back on a lot.

The Group of 20 biggest economies wrapped up their two-day meeting here Monday by easing deficit-reduction targets to ensure countries — such as the fiscally challenged United States and debt-crippled eurozone members — have more time to “recalibrate” their finances to promote growth.

But the group said it will not back down on reforms to the global financial system, and is pushing ahead with its stated timetable for changes.

The United States will carefully calibrate the pace of fiscal tightening to ensure that public finances are placed on a sustainable long-term path

“Global growth remains modest and risks remain elevated, including due to possible delays in the complex implementation of recent policy announcements in Europe, a potential sharp fiscal tightening in the United States and Japan, weaker growth in some emerging markets and additional supply shocks in some commodity markets,” the G20 said in its final communiqué.

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“The United States will carefully calibrate the pace of fiscal tightening to ensure that public finances are placed on a sustainable long-term path, while avoiding a sharp fiscal contraction in 2013,” the G20 said. That is a reference to the so-called “fiscal cliff” of US$607-billion in tax increases and government spending cuts set to take effect in January.

The G20 “will ensure our public finances are on a sustainable path, in line with the medium-term Toronto [G20] commitments in the case of advanced economies. We will ensure the pace of fiscal consolidation is appropriate to support growth.”

Those commitments called on G20 members to cut their deficits in half by 2013, a target the U.S. will not meet.

Canadian Finance Minister Jim Flaherty, who attended the talks along with Bank of Canada governor Mark Carney, said “the weak global outlook was at the core of our discussions.”

“The outlook only reinforces the need for G20 members to take actions to deal with the short-term risks they face that affect us all and to follow through on our individual country commitments so that we are moving toward strong sustainable and balance growth,” he told reporters.

In a later interview, Mr. Flaherty said “a number of us went relatively easy on the Europeans this time.”

“The reason for this is that after [the G20 meeting in] Tokyo their leaders got together and for a first time actually put a deadline on something, which we’ve been after them for for a long time,” he said.

“The deadline was for the end of the year for the finance ministers [to] have the legislative framework for a new single supervisory body. And then they instructed the finance ministers to get the job done to create the implementation. They haven’t done that before. So that’s encouraging.”

There has also been criticism over the slow progress in global financial reforms, known as Basel III. On Monday, the G20 said it was pushing ahead with those changes, even as many countries are already behind schedule.

“We remain committed to the full, timely and consistent implementation of the financial regulation agenda, and discussed the latest FSB [Financial Stability Board] reports on progress and implementation of the agreed reforms,” the communiqué said.

However, one of the reports released Monday by the Swiss-based FSB, chaired by Mr. Carney, showed only eight of the 27 members of the Bank of International Settlements have final rules in place. Canada has draft regulations only ready for the Jan. 1 implementation deadline. Still, Mr. Carney told reporters that Canada will meet the deadlines laid out for Basel III.

Mr. Carney said there was no discussion in Mexico City concerning possible sanctions on countries that did not meet the financial regulations.

“The expectation is to use peer pressure, of which there is considerable, to ensure that all jurisdictions are meeting their Basel commitments in a timely manner,” he said.

The Basel rules include stringent guidelines for a massive jump in bank capitalization over the six-year timeframe.

Governments have argued that setting aside so much capital would limit the ability of banks to lend money and that would temper economic growth.

The G20 meeting was also notable for those absent from the talks.

U.S. Secretary Treasurer Timothy Geithner did not attend the G20 meeting, sending Undersecretary for International Affairs Lael Brainard in his place. Mr. Geithner, a powerful voice is G20 affairs and someone who could have provided strong commentary on the U.S. fiscal crisis, has stated he will step down regardless of who wins — Barack Obama or Mitt Romney.

French Finance Minister François Baroin also stayed away, as did European Central Bank president Mario Draghi — a surprise development given his leadership role during the euro debt crisis.